By Thomas Harban

Certain general areas of concern with professional indemnity (PI) claims

In our previous practice management articles, the Attorneys Insurance Indemnity Fund NPC (the AIIF) have often focussed on alerting attorneys to the common risk areas in practice and have made suggestions with regard to the mitigation of these risks. Our articles have thus focussed on how to avoid being a defendant in a PI claim. In this month’s article, the AIIF has opted to address the risks from the opposite side and will focus on the considerations to be taken into account by plaintiff’s attorneys in pursuing PI claims on behalf of clients.

In recent years there has been a marked increase in the number of PI claims brought against attorneys and other professionals (medical professionals in particular). It has previously been noted that as other areas of work have seen a decline, some members of the legal profession have seen the pursuit of PI claims as a new area in which work (and fees) can be generated. Naturally, persons who suffer a loss as a result of the negligence of a professional are within their rights to pursue a PI claim against the party concerned. However, practitioners pursuing PI claims on behalf of their clients should be aware of the specific risks associated with this type of work. The pursuit of a PI claim could potentially be a double-edged sword for the practitioner acting for the plaintiff if the risks associated with this specialist type of work are not adequately addressed. The AIIF has been notified of a number of claims where the attorney instructed to act for a plaintiff in a PI claim is, in turn, later sued by the erstwhile client on the basis that the initial PI claim was not properly handled resulting in the client suffering damages. This has particularly been the case with medical malpractice claims but the risks can apply to other PI claims as well.

One of the risk areas is that some members of the profession cite the incorrect defendant. In the Risk Alert Bulletin (No.1/2017) (RAB) distributed with the combined January/February 2017 issue of De Rebus (see also www.aiif.co.za/riskalert/, accessed 3-2-2017), the AIIF included an article giving an update on some of the considerations to be taken into account in pursuing medical malpractice claims. The considerations that the AIIF has highlighted in the RAB, include those aimed at ensuring that the correct defendant is cited. Other considerations to be taken into account in all PI claims include the correct quantification of the damages and calculation of prescription periods. Practitioners must be careful not to under-settle professional indemnity claims and must also be aware in order to avoid the prescription of the PI claims in their hands. Prescription runs in PI claims, as with any other type of claim.

Where an attorney is instructed to pursue a claim against, for example, a medical professional or a health care provider, it would be considered unusual that the PI insurer of such party is cited instead of the party concerned. However, with claims against attorneys, plaintiff’s attorneys often incorrectly cite the AIIF instead of the party against whom the alleged claim arises. The result is that the AIIF dedicates resources (human and financial) to defending a claim where it should not be cited as a party.

In circumstances where the party against whom the PI claim lies is sequestrated, practitioners should examine the facts carefully in order to ascertain whether or not the provisions of s 156 of the Insolvency Act 24 of 1936 will apply.  This section reads as follows:

‘156. Insurer obliged to pay third party’s claim against insolvent

Whenever any person (hereinafter called the insurer) is obliged to indemnify another person (hereinafter called the insured) in respect of any liability incurred by the insured towards a third party, the latter shall, on the sequestration of the estate of the insured, be entitled to recover from the insurer the amount of the insured’s liability towards the third party but not exceeding the maximum amount for which the insurer has bound himself to indemnify the insured.’

The investigation to be carried out before instituting a claim in terms of s 156 of the Insolvency Act should include –

• whether or not there was an insurance policy in place;
• the terms of such policy (including the limit of indemnity available); and
• an assessment of whether or not such policy would have responded to the claim.

Section 156 of the Insolvency Act does not give more rights to the creditor than the insured would have had in the ordinary course.

The AIIF have been notified of a number of claims, where it (as an entity), is cited as a defendant rather than the law firm – which dealt with the underlying matter – and against which the alleged claim lies. In addressing this question, it would be prudent to give an overview of the AIIF and its functions. Unfortunately, there are many practitioners who are still unaware of the existence of the AIIF, its functions, the basis on which it provides indemnity or to whom such indemnity is provided.

The AIIF

The AIIF is a non-profit, short-term insurance company established by the Attorneys Fidelity Fund (the Fund) acting in terms of ss 40A and 40B of the Attorneys Act 53 of 1979. The AIIF protects the profession from losses associated with professional indemnity claims, which indirectly provides a benefit to members of the public. The AIIF provides PI insurance, bonds of security to executors and risk management services to the profession. The AIIF services are provided at no cost to the profession, the funding being provided by way of an annual premium paid by the Fund. (The funding model of the AIIF will change in the near future and the profession will be called on to make a contribution to the premium funding. The Fund and the AIIF will communicate further with the profession in this regard in due course.)

The AIIF issues one Master Policy annually in terms of which all practising attorneys are covered. A copy of the AIIF policy can be accessed on our website www.aiif.co.za.

The Preamble of the AIIF policy reads as follows:

‘The Attorneys Fidelity Fund, as permitted by the [Attorneys] Act, has contracted with the Insurer [the AIIF] to provide professional indemnity insurance to the Insured, in a sustainable manner and with due regard for the interests of the public by:

1. a) protecting the integrity, esteem, status and assets of the Insured and the legal profession;
2. b) protecting the public against indemnifiable and provable losses arising out of the Legal Services provided by the Insured, on the basis set out in this policy.’

(The words in bold appear as such in the policy and are defined in that document.)

Provided that each sole practitioner, partner or director in a legal practice or any person who is publicly held out to be a partner or director of the legal practice has, or is obliged to have, a current Fidelity Fund Certificate at the time the claim is made, the AIIF insures such legal practices providing legal services. The AIIF policy covers:

• sole practitioners;
• partnerships; and
• incorporated practices of practitioners.

Former partners, the estates of deceased practitioners and employees of the legal practice are also covered on the terms set out in the policy. Regard must be had to clause 5 of the AIIF policy in order to ascertain who is covered.

The AIIF policy sets out the terms of insurance relationship between the company (as insurer) and legal practitioners covered by the policy (as insureds). The policy does not give any rights against the AIIF to third parties (such as claimants) (see clause 39). The policy sets out the basis on which the AIIF agrees to grant indemnity to the insured against professional legal liability to pay compensation to any third party (see clause 1). Only an insured can thus notify the AIIF of a claim or submit an application for indemnity in terms of the policy.

Regard should be had to the res inter alios acta, aliis nec nocet nec prodest maxim. A third party (such as a claimant), is not a party to the AIIF insurance policy and thus cannot claim rights afforded to an insured attorney under the policy.

The AIIF has also had an increasing number of attorneys acting for plaintiffs against insured firms who institute action against the firm concerned, but then also seek (qua plaintiff) to notify the AIIF of the claim. These purported applications for indemnity by the plaintiffs will not be entertained by the AIIF.

Where, without legal basis, the AIIF is cited in claims, the actions will be defended and the AIIF will look to the plaintiffs and their legal representatives to refund the costs incurred in pursuing a defence in such matters.

Legal practitioners pursuing actions, where the incorrect defendant is cited, run the risk of the claim against the correct defendant prescribing in their hands.

Practitioners must also familiarise themselves with the differences in the functions and the risks covered by the Fund and the AIIF respectively. The Fund is a creature of statute (s 25 of the Attorneys Act) and its purpose is set out in s 26 of that Act. There are certain limitations to the liability of the Fund (s 47). When acting for a claimant in circumstances where there has been an alleged theft of trust funds, practitioners should have regard to the time limits for the pursuit of such claims (see the Fund’s website www.fidfund.co.za for details). An investigation should also be made into whether or not the alleged defaulting attorney had insurance for misappropriation of trust funds – this will assist in assessing whether the circumstances fall within the ambit of s 156 of the Insolvency Act and also insofar as the Fund’s limitations of liability in terms of s 47 are concerned.

In circumstances where the AIIF has issued a bond of security to an attorney appointed as executor of a deceased estate, such bond of security is issued in favour of the Master of the High Court. A party acting for a beneficiary of an estate who alleges that the executor has failed to properly act in any manner will thus have to report the matter to the Master who, as the party in whose favour the bond is issued, will address the matter with the AIIF and seek to trigger the cover in terms of the bond.

Conclusion

Practitioners are urged to contact the AIIF should they have any queries regarding any of the issues raised in this article.

Thomas Harban BA LLB (Wits) is the General Manager of the Attorneys Insurance Indemnity Fund NPC in Centurion.

This article was first published in De Rebus in 2017 (March) DR 11.